Beiersdorf Ag And The Cosmetics Industry

Beiersdorf Ag And The Cosmetics IndustryBeiersdorf AG (BDF), together with its subsidiaries, engages in the manufacture and distribution of grungeed consumer goods in the main in europium, the the Statess, Africa, Asia, and Australia. The lodge ope rank in two segments, Consumer and Tesa. The Consumer segment offers skin and beauty care harvests under the Labello, NIVEA, 84, la prairie, JUVENA, atrix, Eucerin, FUTURO, Hansaplast/Elastoplast, and Florena brand names. The consumer division represents everyplace 80% of the companys core value gross revenue. The Tesa segment engages in the development, end product, and food commercializeing of self-adhesive system and product solutions for industrial customers and consumers.Beiersdorf Aktiengesellschaft was founded in 1882 and is based in Hamburg, Germany. The conclave has around 17,300 employees and over 150 affiliates worldwide. Since 2003, the company has been part of the Tchibo Group.The group recorded revenues of 5,120 mi llion during the m whizztary year ended December 2006, an change magnitude of 7.2% over 2005. The operating profit of the group was 477 million during fiscal year 2006, a decline of 15.8% over 2005. The net profit was 664 million in fiscal year 2006, an increase of 99.4% over 2005.This report analyses the economic aspects of the personal line of credit of cosmetics and the consumer segment of Beiersdorf AG.2. IntroductionIn 2006, the cosmetics and toiletries industry posted $163 billion, a maturement consider of more than 5% over 2005 $155 billion. Euromonitor International forecasts average annual growth of 3% to setting global sales of more than $313 billion by 2011. (GCI, 2007).The industry continues to benefit from a combination of strong macroeconomic trends (including a worldwide face lift in consumer spend power) key demographic factors much(prenominal) as aging populations and high life expectancies an increased interest in look and personal care as a means of p reventive healthcare and lifestyle and climatic changes that are creating opportunities for new product niches. Legislative restrictions are having a positive impact by improving consumer confidence and facilitating international mickle, and technological advances are improving product efficacy and providing manufacturers with new marketing tools and publicise opportunities.3. disceptation and MarketsMicroeconomics Porters 5 ForcesBased on Porters five forces model which determines the intensity of the industry competition and profitability (Porter 1980, p3), Beiersdorf has an advantage in the cosmetics industry their hereditary pattern and unmatched leadership in skin care through NIVEA has created an immediate stronghold over its competitors in the industry as well as differentiation. However the threat of supervene upon products and services could affect Beiersdorfs popularity.Threat of New Entrants MediumA large number of firms nock their products and maintain a certain degree of control over their pricing. This monopolistic competition has relatively low barriers to entry and exit. Government regulation, mostly related to safety issues, and distribution channels appear to be the most probative barriers to entry in the cosmetics industry. Beiersdorf has the advantage of economies of scale, an established supply and distribution channels and high product differentiation, to compete and have an incumbent advantage. The capital requirements of entry, customer and supplier loyalty, legislation, and retaliation are moderate, which indicate that a new entrant is hindered to enter the market and compete. To stay competitive, Beiersdorf needs to continually innovate.Threat of Substitutes HighThe risk of product-for-product switching is high as equivalent product benefits are available both in generic and branded form. Beiersdorf has contended with this risk by continuous innovation and introducing droll formulations across global markets. Beiersdorf h as worked to expand its presence in the global personal care market by promoting its flagship brand NIVEA, which launched a global marketing front last summer that intends to cover 64 countries by mid-2008. To increase sales by presenting consumers with innovative new products, Beiersdorfs expenditure on RD rose 7.6 per cent to 127m in 2007 and this enthronisation is expected to help the company launch successful new products in the years ahead (Cosmetics Design, 2007).Bargaining Power of Buyers MediumBuyer (customer) ingress is moderate as product differentiation and distributed markets ensure relative price differences that ensure profitability. This indicates reduced bargaining power of the buyers. Loyalty to Beiersdorfs products is relatively high and the live of switching buyers is medium. The risk of supplier acquired by the buyer is less as the products are proprietary formulations. Beiersdorf also differentiates through choice and beginning(a) to market innovation. As such(prenominal), they should be un allow foring to accept compromises on quality. This go forth also be reliable for emerging economies, where, as they develop and innovation becomes a competitive differentiator, buyers will be less willing to compromise on quality.Bargaining Power of Suppliers MediumIngredients are individually sourced from suppliers and blending them into unique proprietary products has traditionally been Beiersdorfs patriarchal effectivity. Suppliers concentration is high with the added risk of buyer being acquired by the supplier. However, the cost of switching suppliers is moderate and boilersuit, suppliers increasing costs is less impactful on the profitability.Competitive contention HighDespite an unfavourable environment in Beiersdorfs key region of Western Europe, the company has managed to consistently outperform global sales of cosmetics and toiletries over the go off menstruum and by one percentage point in 2006. Beiersdorfs global sales growth (6%) is above that of its direct competitors Procter Gamble and Unilever, although LOr al outperformed by one percentage point. However, like LOreal and other major global players, much of this growth is derived from emerging markets.This procedure tends to demonstrate that Beiersdorfs growth strategy is successful. However, the degree by which Beiersdorf outstripped overall sales has lessened. It is essential for Beiersdorf to continually invest in RD to maintain their competitive differentiation and profitability.The recent revision of Beiersdorfs growth strategy indicates that the company identified the expert targets for growth, both at product category level, such as with a focus on mens grooming products, and at a geographical level. The slight discrepancy from the previous focus on North America seems wise, as sales in this region are forecast to remain sluggish over the period 2006-2011. On the other hand, increased efforts to launch Beiersdorfs brands in high-growth co untries such as China and Russia should prove very beneficial.4. Market demand and concord the consumerThe law of diminish marginal utility holds for the cosmetics sector. A shift in the demand curve will be seen as a result of changes in demand repayable to factors other than price, such as increases in consumer income, changes in taxes on the product, changes in price or availability of competing products, and changes in expectations of future prices (Wilkinson 2005, p.82).Various elasticity concepts, including consume price elasticity, income, advertising and cross-price elasticises of demand as well as consumer indifference curves are very important to the company as they influence the pricing and advertising strategies (Jones 2004, p.98).The demand curve for Beiersdorfs portfolio can be expressed as D1, displayed in Figure 3. P1Q1 represents the market equilibrium point for quantity and demand for the pricing strategy.Beiersdorf amplification of its market share in 2007 by foc using on product innovation and emerging markets with a special focus on the Chinese market was supported by high sales of Nivea Visage and Nivea for Men, and sales in China increased 45.1 per cent in 2007 contributing to a 7.6 per cent rise in the companys turnover to 5.5bn, indicated by an outward shift in the demand curve from D1 to D2. At this price point, quantity sold was higher (P2Q2). Sales were up 12.8 per cent and the jump in profits was also receivable to the companys logistics and production revamp, which has centred on its hair and skin care operation in Europe during the then(prenominal) two years. Thus, the demand curve may well have sloped more sharply upwards than it appears in Figure 3. This raises the equilibrium quantity from Q1 to the higher Q2.These curves demonstrate that Beiersdorfs overall revenue has grown considerably from 2006. In its financial results for 2007 the company reported sales of 5.5bn for the fiscal year, which adjusting for currency tr anslated into a 9.1 per cent increase on 2006.Also, Beiersdorfs growth is driven by advertising and promotion, alongside heavy research and development investments. Faced with growing maturity in its key market Western Europe, Beiersdorf has not limited its growth strategy to product innovation. In accessory, the company is focusing on alternative retail channels.5. Market supply and understanding the companys costsMarket supply is the aggregate of individual firm supply, determined by factors affecting firm supply. The market supply function for a product is a statement of the relation between the quantity supplied and all factors affecting that quantity (Hirschey 2005, p.110).With the dual aim of halving working capital requirements and saving costs, the Company embarked on a restructuring of its supply chain in 2005. Originally managed locally, all major supply chain processes, including planning, sourcing, production, delivery and returns are now moving towards more exchange m anagement. Processes are being optimised, in order to reduce the time-to-market for new products, and products and processes are being standardised as much as possible to achieve economies of scale.In Europe, Beiersdorf has already adapted its production sites and logistics centres to reflect actual demand and has reduced overcapacity. For example, early 2007, the company sold its production and logistics facilities in France, as well as its Hamburg-based logistics centre and its Heitersheim-based soap factory both in Germany. In Asia, Beiersdorf conducted an in-depth analysis of its product and supply chain during 2006. It is expected to roll out its Asia restructuring plan in 2008. Meanwhile, on the back of beneficial occupancy tax reform net profit leapt to 132m from 74m in 2006.Although Beiersdorf began to focus a large part of its efforts into strengthening its sight in high-growth regions such as Eastern Europe, Latin America and Asia-Pacific, the company is behind many othe r international manufacturers. Many players identified the same areas as key targets over the last few years. Without first-mover advantage, Beiersdorf will have to match its competitors in terms of distribution, price and product support in order to reach new customers.6. Market analysis, failure and responsesMarket failure is the situation where the market mechanism fails to allocate resources efficiently (Wilkinson 2005, p.473). There are a number of reasons why market failure might occur inefficiencies, imperfect competition due to oligopoly in the cosmetics market, external economies and diseconomies of production, pure private and pure public goods and government intercession in the form of taxation and subsidies to try and restore social equity while exercising other options such as legal measures and persuasion.Annual sales growth in the cosmetics and toiletries market has fallen gradually from 21.2 per cent in 2002 to 11.3 per cent last year to $20.9bn. Overall growth figu res are slowing as the market matures although breaking down the figures suggests high double-digit growth is still achievable in the market for more sophisticated products. Picking out two categories for comparison, aid cosmetics sales increased 15 per cent last year whereas deodorant sales grew by only 8.2 per cent (Cosmetics Design, 2008).Beiersdorf should achieve growth figures in rudimentary and Eastern Europe with targeted growing niches and expanded market share. In addition, Beiersdorf paid 269.45m in October for an 85 per cent stake in China-based C-Bons Hair Care, which owns the Slek and Maestro brands (Cosmetics Design, 2007). This will importantly strengthen Beiersdorfs market share in China.7. Market structures and company strategiesEconomists classify market structures into four main types perfect competition, monopoly, monopolistic competition and oligopoly (Wilkinson 2005, p.313). The cosmetics disdain is an oligopoly. With competitors such as Unilever, LOreal, Pr octor and Gamble, Avon, Est e Lauder Cosmetics, and other large corporations, Beiersdorf attempts to maintain a technological superiority through path-breaking innovations and their super successful soft-sell techniques. The continual research and development of cosmetics, combined with the universal human desire to look the best they can, suggests that the industry has great electric potential. The strategies used by Beiersdorf are an attempt to differentiate itself from other competitors in the industry.Despite an unfavourable environment Beiersdorfs global sales growth (6%) is above that of its direct competitors Procter Gamble and Unilever, although LOreal outperformed by one percentage point. This performance tends to demonstrate that Beiersdorfs growth strategy is successful. The recent revision of Beiersdorfs growth strategy indicates that the company identified the right targets for growth, both at product category level, such as with a focus on mens grooming products, and at a geographical level. The slight departure from the previous focus on North America seems wise, as sales in this region are forecast to remain sluggish over the period 2006-2011. On the other hand, increased efforts to launch Beiersdorfs brands in high-growth countries such as China and Russia should prove very beneficial.8. Economic output and national wealthEconomic output is measured with actual growth and potential growth. Actual growth may be defined as the actual annual increase in national product or real gross domestic product per annum, normally expressed as a percentage or on a per capita basis. In contrast, potential growth is the annual increase in a countrys productive capability. Actual growth may fall short of potential growth if the economy is working at less than full capacity, which is if it works indoors its production possibility frontier. Economic growth is perceived to be desirable since higher growth benefits the population of the country. However, hig h shorter term economic growth using non-renewable resources, causes slow long term growth.Cosmetics industry contributes positively to the GDP due to its manufacturing activity. Beiersdorfs products are manufactured across the world and in all its major markets it has manufacturing facilities or agreements with affiliates. Beiersdorf also supports beauty salons and massage parlours with its professional products and thus indirectly supports local economies.9. Economic growth and business cyclesThe global economy recorded sound growth in the early part of 2007. However, in late summer the ongoing slowdown on the U.S. real estate market triggered fears regarding the creditworthiness of financial market products and institutions in the U.S.A. and Europe. U.S. monetary policymakers moved to counter rising cyclical risks by cutting interest rates.Nevertheless, the drop in real estate prices, rising default rates for mortgage loans, and the jump in jobless rates at the end of the year d irect to a market slowdown in the growth of U.S. consumer spending and hence in the economy as a whole. Against this background, the U.S. dollar came under strong pressure in the second half of 2007. In addition, the euro appreciated significantly against the yen, impacting the international competitiveness of European companies.Continental European economies were dominated by robust growth in exports and investments and further improvements on the job market, but were squeeze by an increase in inflation risks, fuelled by rocketing prices for oil, energy, and food.Figure 7 Inflation in 2007Source Beiersdorf Annual Report, 2007The ongoing rapid expansions of the Chinese market, where growth rates are at about 12%, continue to offer sales opportunities for European producers. At the same time, Chinas growing demand for raw materials led to price rises on the global commodities markets. Although Continental Asian countries saw dynamic development, Japanese growth is below expectations . In Latin America, growth remained stable at around 5% in 2007, while in Eastern Europe it was 6%.Business cycles effect on Beiersdorf, as a factor of investment and consumer spend on goods and services, is limited as its products cater to virtually every age-group among consumers and its flagship brand NIVEA and its extensions as an umbrella brand have gained immense value and loyalty.It is true that mass-market cosmetics are not essential for life, however, the relative low-cost of the products, and the heavy reliance on image enhancement, especially in women, prompt that cosmetics would not be the first items to be forsaken in time of economic hardship. This makes the industry more resistant to recessions and other economic downturns.10. Capital accumulation and technological progressIn addition to Beiersdorfs acquisitions, the investments in operating activities amounted to 106 million relating to intangible assets and property, plant, and equipment in 2007.Innovative product d evelopment is a strategic factor at Beiersdorf for ensuring competitive strength and group growth, based on over 80 years of research and development. In 2007, the company spent 127 million on research and development (2.3% of sales). On a global level, 870 members of staff without C-BONS Hair Care are employed in research and development.11. Labour markets and unemploymentThough unemployment is creeping, unbridled inflation has played havoc with goodness prices and interest rate turbulence. This can lead to loss of jobs as companies may trim their expenses in an effort to counter inflation.Beiersdorf enjoys a healthy growth rate of over 6% against the industry growth of 4% average. There is no threat of unemployment and labour market issues for Beiersdorf due to its unassailable market share and brand loyalty across the world. The resilience of the economy could be impacted by unemployment, but is unlikely to directly impact demand for Beiersdorfs products, due to its strong her itage and the NIVEA brand pull.12. Role of government and fiscal policyGovernment expenditure and taxation is the basis for fiscal policy. Cosmetics are regularly taxed and such taxes have a notional effect on demand of Beiersdorfs products.However, customs and import duties on raw materials and finished goods have an impact and the company appears to counter such personal effects with local manufacture and continued product innovations.13. Role of government and monetary policySince inflation and money supply determine the monetary policy, inflation is countered with a change in interest rates to affect a control on money supply.Beiersdorf indicates that currency, interest rate, and liquidity risks are subject to active exchequer management. In most cases they are managed and hedged centrally. Derivative financial instruments serve solely to hedge operational activities and financial transactions essential to the business. The Company limits potential default risks relating to the investment of the Groups liquid funds by only making short-term investments with prime-rated counterparties.Consumer impact of monetary policy may affect spending on cosmetics. However, brand loyalty and preference for personal grooming offset any adverse impact.14. Foundations of international tradeThe law of absolute advantage and the law of proportional advantage are the basis for international trade. Countries specialise in goods and services which they have the greatest aptitude for producing due to natural resource endowments, or because of the acquired skills of their workforce. These factors of production are largely immobile between countries so trade takes place in the goods which they produce.The terms of trade of a country might change as the result of a change in the composition of its exports or imports, or a change in the price of its exports or imports. For the former, businesses selling higher priced products such as software as opposed to low level manufactures wo uld be one cause of an improvement in the terms of trade. This leads to the issue of free trade against protectionism, such as import tariffs, quotas, exchange controls, export subsidies and administrative barriers.Beiersdorf with 150 affiliates worldwide is a major player in international trade. It leverages inherent strength of each country it operates in and extends these advantages across its global markets.Beiersdorf projects that the consumer segment of its business will continue to enjoy growth of approximately 8 per cent due to its increased China focus, which is double the cosmetics market as a whole. China does not however carry the burden of delivering sales growth for the company alone(predicate) and Russia, Brazil and India have been identified as fellow drivers for growth. This is more confident than the outlook of competitor LOreal which, on the back of recent results affected by the debile US dollar, pulled down its expectations for the full year to just under 6 pe r cent growth (Cosmetic Design, 2008).15. ConclusionThe cosmetics industry, business and market analysis, based on the 12 strands of the Grenoble syllabus, identify several important issues. Central to the planning and development of strategies within the business environment is based on an understanding and interpretation of micro- and macro-economic factors. Applying the above 12 economic factors to Beiersdorf performance, it is clear that market, governmental and global forces act upon the company, affecting strategic decisions. The business is consumer-oriented and market driven. Sustaining market share and ensuring growth in this free and highly competitive market requires continuous application of information analysis, strategic decision-making and rapid execution.Constant innovation, vast potential in emerging markets, maturing markets in Western Europe and US, varied preferences of consumers across global markets who also seek consistent quality and product standards, may r esult in dramatic shifts along the demand curve.An oligopoly, the cosmetics business thrives on capital accumulation and technological progress, ensured by economic growth, business cycles and international trade. Fiscal and monetary measures by the governments and labour issues influence the business to a limited extent.Beiersdorf is a successful global company in this sector and its growth and expansion over the decades indicates a healthy and competitive advantage.